Fiduciary Advice and 12b-1 Fees


broker-dealers, DOL, fiduciary, prohibited transaction, registered investment advisers, service providers

The DOL recently settled a case for $1,265,608.70 with a firm that provided investment advice to retirement plans. Based on the DOL’s press release, the firm served as a fiduciary investment adviser to ERISA plans and recommended investments in mutual funds. In addition to the firm’s advisory fee, it also received 12b-1 fees.

Based on the press release, it appears that the DOL asserted two claims. The first is that the receipt of additional fees (which could include both 12b-1 fees and some forms of revenue sharing) is a violation of the prohibited transaction rules in section 406(b) of ERISA.

The second theory appears to be that, where a fiduciary adviser receives undisclosed compensation, the adviser has, in effect, set its own compensation (to the extent of the undisclosed payments). In the past, the DOL has successfully taken the position that, by receiving undisclosed compensation, a service provider has become the fiduciary for the purpose of setting its own compensation and has used its fiduciary status for its own benefit.

In any event, RIAs and broker-dealers need to be particularly conscious of undisclosed payments and/or payments in addition to an advisory fee. In recent years, the DOL has gained a greater understanding of RIA and broker-dealer compensation and is actively investigating both.

I have reviewed the 408(b)(2) disclosures of a number of broker-dealers. In a few cases, the broker-dealers specifically state that, where they were serving as fiduciary advisers, they were also receiving additional compensation (e.g., revenue sharing). Those disclosures raise issues about prohibited transactions.

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The Benefits of Mandatory Distributions: A White Paper


plan sponsors

Small 401(k) accounts of former employees increase plan costs, expand administrative obligations and extend fiduciary responsibilities. Plan sponsors should consider distributing these accounts under a well-defined process and regulatory safe harbors, and advisers can provide a valuable service to their clients by educating them on the benefits of mandatory distributions and helping them set up a routine process for sweeping out small accounts. By small accounts, we mean accounts of former employees with vested balances of $5,000 or less. (In determining whether an account falls under the $5,000 limit, amounts rolled over from a prior plan or IRA and earnings on those amounts are not considered. Thus, an account may have a larger total balance and still be considered a “small account” for purposes of this concepts discussed in this White Paper.)

This White Paper discusses the reasons for – and benefits of – making mandatory distributions on a regular basis and the regulatory guidance related to these distributions under the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA). We also address whether financial advisers may be compensated in connection with such distributions. In the Discussion and Analysis section of this White Paper, we summarize the issues and rules and discuss services that can assist plan sponsors and advisers in handling mandatory distributions. In the three Appendices, we describe the regulatory guidance in greater detail – for those who want a deeper understanding of the legal underpinnings for our conclusions.

To see the full text of this White Paper, click here:

The Benefits of Mandatory Distributions A White-Paper-February-2013

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Anticipated DOL Guidance


408(b)(2), DOL, fiduciary, plan sponsors, service providers

The Department of Labor recently issued its agenda for regulatory guidance. Several of the projects will impact retirement plans and particularly 401(k) plans. This email focuses on a DOL project to amend the 408(b)(2) regulation to possibly require that cover service providers furnish a “guide” or similar tool, along with the disclosures. In its description of the project, the DOL states: “A guide or similar requirement may assist fiduciaries, especially fiduciaries to small and medium-sized plans, in identifying and understanding the potentially complex disclosure documents that are provided to them or if the disclosures are located in multiple documents.”

As background, the final 408(b)(2) regulation contain a sample guide. Covered service providers may want to review that part of the regulatory package in order to understand the DOL’s approach. Briefly described, though, that guide would require that, for each mandated disclosure, a covered service provider indicate the section number and page number where the particular disclosure was made. They might be viewed as a one or two page index of exactly where the required information was located. In other words, it is not a summary, but instead a “map.”

It appears that the DOL is concerned that—by using multiple disclosure documents or lengthy or complex documents—service providers may have presented the disclosures in a manner that is difficult for plan sponsors to understand. While the guide would likely benefit plan sponsors, it can impose a significant burden on providers who have used multiple documents and/or lengthy documents to make their disclosures. That would be particularly true where the paragraph numbers and/or page numbers can change from plan to plan. That would also be difficult for covered service providers who refer to other documents, such as a mutual fund prospectuses.

Unfortunately, the DOL description of the project does not indicate whether the requirement will be applied only prospectively or whether it would apply retroactively. If I had to guess, it would be that the DOL would make the application prospective…simply because of the cost and burden of the “re-disclosing” to existing plans.

In any event, the guidance will be issued in proposed form and there will be a comment period. At this point, the DOL has indicated that it is targeting a May date for release.

 

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Plans With Only Brokerage Accounts


404a-5, DOL, fiduciary, General

On July 30, the DOL reissued its Field Assistant Bulletin (FAB) concerning participant disclosures. The FAB was reissued because of the controversy about the DOL’s position on individual brokerage accounts.

The new FAB deletes the old, and controversial, Q&A 30 and replaces it with a new Q&A 39.

While some of the controversial provisions were removed, some remain. For example, the DOL states:

“…in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raising questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty.”

Continue reading Plans With Only Brokerage Accounts →

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Brokerage Windows and Retirement Plans


DOL, fiduciary

When the Department of Labor issued Field Assistant Bulletin (FAB) 2012-02, the private sector was “shocked” by the DOL’s position on fiduciary responsibilities for brokerage windows in defined contribution plans, such as 401(k) plans. The Department subsequently partially reversed part of its guidance. However, significant portions of that guidance remain, and it continues to be a DOL position that plan sponsors have fiduciary responsibilities for brokerage windows in retirement plans.

My partner, Bruce Ashton, and I recently wrote an article about brokerage windows for TD Ameritrade. As explained in the introduction to the article:

“The first topic of this article, and its principal focus, is the fiduciary process for deciding whether to offer a brokerage window and selecting the provider of the window. The second covers the requirements under the new participant disclosure rules. Finally, we consider the implications of the fiduciaries or a participant selecting an RIA to serve as an investment manager or advisor for a participant’s individual brokerage window.” Continue reading Brokerage Windows and Retirement Plans →

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Participant Disclosures about Brokerage Accounts


404a-5, broker-dealers, DOL, fiduciary, plan sponsors

The DOL’s 404a-5 regulation places a fiduciary obligation on plan sponsors—in their roles as ERISA plan administrators—to make certain disclosures to participants. In the rush to comply with the 408(b)(2) disclosures, some broker-dealers may have overlooked the participant disclosure guidance about brokerage accounts in Field Assistance Bulletin (FAB) 2012-02.

While the legal obligation is imposed on plan sponsors, the obligation will, as a practical matter, be on broker-dealers, since plan sponsors do not have the information or capability of making these disclosures. As a result, they will turn to their broker-dealers to satisfy the compliance requirements.  Continue reading Participant Disclosures about Brokerage Accounts →

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408(b)(2) Violations and Service Provider Correction Program


408(b)(2), broker-dealers, recordkeeper, registered investment advisers, service providers

The failure of a covered service provider (for example, a broker-dealer, RIA or recordkeeper) to provide adequate 408(b)(2) disclosures results in a prohibited transaction . . . for both service providers and plan sponsors. While the regulation has an exemption for plan sponsors (if they follow certain steps), there is no similar exemption for covered service providers.  Continue reading 408(b)(2) Violations and Service Provider Correction Program →

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Disclosures for Individual Brokerage Accounts


404a-5, 408(b)(2), broker-dealers, DOL

In DOL Field Assistance Bulletin (FAB) 2012-02R, the Department of Labor explained the disclosures for individual brokerage accounts in participant-directed plans. I am concerned that many broker-dealers have not focused on these new “requirements.” That is true for several reasons, including:

  • So much money and energy have been devoted to complying with the plan disclosure requirements, that is, the 408(b)(2) disclosures.
  • The 404a-5, or participant, disclosure requirements are imposed on plan sponsors, in their fiduciary capacity. Stating this slightly differently, the participant disclosures for brokerage accounts are not imposed on broker-dealers, but instead are placed on the shoulders of the plan sponsors. Since it is not a legal responsibility for broker-dealers, it has not received the same attention as the 408(b)(2) disclosures. However, as a practical matter, plan sponsors will turn to the broker-dealers and insist that they satisfy those disclosure requirements. That seems like a reasonable position, since the information is in the control of the broker-dealers.

The FAB provides detailed information about the requirements. To name a few, there is a requirement for a written description of the brokerage account; there must also be an explanation of any fees and expenses that are likely to be incurred in the brokerage account; and, participants must be provided with statements, at least quarterly, describing the fees and charges, both as dollar amounts and in a narrative form.

My sense is that few broker-dealers are prepared to offer assistance at that level of detail. However, I expect that will change now that the work on the 408(b)(2) disclosures is behind us.

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Asset Allocation Models


404a-5, 408(b)(2), DOL

Based on the DOL guidance in FAB 2012-02, many advisers have concluded that asset allocation models (AAMs) can be offered to plans without the need to treat them as designated investment alternatives (DIAs) and, therefore, without the need to report the performance history, expense ratios, etc., of the AAMs.

Unfortunately, that is an oversimplification and may inadvertently lead to problems under both the 408(b)(2) and 404a-5 regulations.  Continue reading Asset Allocation Models →

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408(b)(2) and Plan Sponsors


408(b)(2), fiduciary, plan sponsors

My law firm recently published a bulletin about the responsibilities of plan sponsors, as the “responsible plan fiduciaries,” for reviewing the 408(b)(2) disclosures of covered service providers. A copy of the bulletin can be found at:

http://www.drinkerbiddle.com/resources/publications/2012/
ERISAServiceProviderDisclosuresWhatPlanSponsorsNeedtoDoNow?Section=Publications

While many plan sponsors and almost all advisers understand that fiduciaries must evaluate the compensation of service providers to ensure that it is reasonable, there are other requirements which are less well understood.

For example, there is a requirement that plan sponsors review the disclosures as soon as reasonable to determine whether they have received disclosures from all of the covered service providers and whether the disclosures are complete (that is, whether they include all of the required information). And, it appears that at least part of the review needs to be done by the end of August.

If a plan did not receive disclosures from all of the covered service providers or received inadequate disclosures, plan fiduciaries must request the missing information—in writing. The failure to do so will cause those fiduciaries to be engaged in a prohibited transaction. Furthermore, if a covered service provider does not respond, there are specific steps that fiduciaries must take. Those steps are outlined in our bulletin.

Fiduciaries are required to evaluate the service and status disclosures, in addition to the compensation disclosures. That involves a number of issues, but for the moment, let me mention two. First, one of the status disclosures is whether a service provider is acting as an ERISA fiduciary. However, if a service provider does not expect to be providing services as a fiduciary, it has the option of saying nothing. So, if the 408(b)(2) disclosures do not include a statement of fiduciary status, that means that the service provider does not believe that it is providing fiduciary services. Secondly, the disclosures must be reviewed to determine whether they identify any conflicts of interest. For example, if a service provider would receive higher compensation under one alternative than another, that is a conflict of interest which the fiduciaries must evaluate.

From a risk management perspective, fiduciaries are advised to document those considerations, and their conclusions, in committee minutes.

Take a look at the bulletin. It covers much more than this short article.

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